Bank guarantees - What all landlords should be aware of.

Bank guarantees are often used by tenants to provide landlords or principals under commercial or retail leases with security to perform its obligations. Bank guarantees usually contain terms that are standard amongst commercial leases and contracts and have been known to provide landlords and principals with immediate access to guaranteed funds without having to wait for a decision from a court to confirm that the lessee has breached the lease.

RECENT CHANGES TO THE LAW

A recent decision, Universal Publishers Pty Ltd v Australian Executor Trustees Ltd [2013] NSWSC 2021 casts doubt on the proposition that landlords and principals have immediate access to guaranteed funds and restricts the right of landlords and principals to call on bank guarantees solely relying on a good faith claim. This decision places the burden on landlords to ensure that property or lease agreements are drafted to provide landlords or principals with immediate access to the bank guarantees without having to prove that an actual breach of the lease has occurred.

The court determined that the principal question is whether the landlord is entitled to make a demand on the bank guarantee based on a claim that the tenant is in breach of the lease, or whether it is only entitled to do so if in fact the tenant has breached the lease.

In this case, the lease contained the following standard clause that provided an unconditional undertaking or guarantee from an Australian bank in favour of the landlord:

19.4 In the event that the lessee: 19.4.1 defaults in the payment of Rent or in the performance or compliance of any other obligations under this Lease; or 19.4.2 breaches any other obligation, term, condition or covenant under this Lease, The Lessor is hereby authorised to demand that the guaranteeing bank pay to the Lessor such amount that (in the reasonable opinion of the Lessor) may be due to the Lessor as a result of such default, breach or non-observance by the Lessee or termination of the Lease pursuant to it. However, upon reviewing the clause, the court held that the clause was drafted in a way to suggest that if the tenant was not actually in breach of the lease, the landlord had no right to call on the bank guarantee. The court further held that there was a serious question to be tried as to whether the tenant was in breach of the lease and that damages were unlikely to be an adequate remedy if it was ultimately held that the landlord...